Is the wheat bull is just dozing?

Focus on Futures: Wheat

For the most part, the devastating summer drought of 2012 left U.S. wheat output unscathed. Combined winter and summer wheat planted area of 55.7 million acres was 2.4% greater than in 2011-12, but production grew by 13.5%, to 2.27 billion bushels.

Regardless, wheat prices rallied to five-year highs. The driving force behind the spike to $9.50 per bushel was yet another FSU crop failure. In 2011-12, output recovered to 114 million tonnes from a devastating drought reduced the crop 81 million tonnes in 2010-11. The October USDA estimate for the 2012-13 crop was a downwardly-revised 77 million tonnes.

Prices have been in a holding pattern since July (Chart 1). The expectation of fresh supply from soon-to-be-harvested Southern Hemisphere crops and the promise of larger Northern Hemisphere winter wheat crops has consolidated prices.

In addition, apparent rationing of demand has set in. Consider that the USDA forecast for total 2012-13 U.S. exports is 32.66 million tonnes, which – if achieved – would be 14.4% above 2011-12 total sales. Trouble is, U.S. export commitments stand at 14.7 million tonnes, 9% below last year at this time. Nobody is buying.

The USDA estimate for global consumption is 680.66 million tonnes, down 2% from 2011-12. Output is estimated to fall by 5%, to 658 million tonnes, leaving a formidable production/consumption deficit and a drawdown in ending stocks to 25% of usage, down from 28% in 2011-12 and 30% in 2010-11. Despite the slide in the level of global inventories, the market can survive handily. We are still far from the danger zone seen in 2006-07 and 2007-08, when ending stocks fell to 21% of usage. Nevertheless, the market remains vulnerable.